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Recession - A self-fulfilling Prophecy?

Author: Bob Lang (info)
Website: http://trade-mentor.com
Posted: January 14th, 2008 at 3:47 pm EST
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Recession….it seems to be one of the more hated words in the world. Some can’t utter the word without cringing. Nothing good comes from a recession (or, so we’re told). We’ve all been through one, where technically put growth in the economy contracts to negative numbers for two or more quarters. Of course, speculation runs rampant when the ‘R’ word is bantied about. The race is on for economists for ‘who gets it correct FIRST’ and who calls the coming recovery. It’s a virtual cycle of guessing and one-upmanship. Naturally, all for credibility purposes, right (I think a credible economist is an oxymoron)? But is a recession ever avoidable, and do we make too much of it? Further, how does the media influence the public with information?

Rear-view MIrror

It’s been such a long time since recessionary talk (way back in 2001/2002) that now seems right to light the candle of excitement. Recessions are indeed inevitable…as much as death, taxes and Rolling Stones concerts. We can guess when a recession starts, but the hard evidence comes LATER. Growth spurts need to be followed by ‘rest periods’, to set up for the next growth period. Indeed, recessions are a sign that an economy is growing healthily but is in need of pause. Too much growth too fast can burn out quickly. China has endured this fast track growth and is trying to slow things down, perhaps not to recession…but it’ll feel like one when growth drops from 11% to 4%. Growth rates have to slow down as your base climbs. But, how do we know we’re in a recession? Better yet, how will we know when we’re out of one? The stock and bond markets are the BEST prognosticators we have. For better or worse, stocks discount prices 7-9 months out. The stock market could care less if we’re in a recession now….that forecast was last year! Remember the drops in February and in July/August? That was the predictor of recession. Where were all the experts and economists back then with their prediction? Fact remains that economists have predicted 13 of the last 6 recessions…so much for accuracy. Too much risk of being wrong, I suppose. It’s really a no-brainer to say we’re in a recession now when all the hard evidence points this way. But the fact remains…we won’t know we’re in a recession until we are out of it!

Screams of the Media

Many of us have become programmed or conditioned to listen to various media outlets. Experts come online to give their varying viewpoints and most in general are credible. But our media outlets go for what’s hot, what’s sexy, and what will give them the most viewership. It’s a fact that doom, gloom and tragedy are most watched and heard by the public. How exciting is it to hear someone say the economy is doing well? If you have a job, house, car and travel…you already know this…so you really don’t care. Now, recession talk…that’s something serious, because they told us it is. A public that hears mysterious-type words such as recession (mysterious only because the meaning is not completely understood) for the first time in awhile becomes frightened and worried. Thoughts? ‘I need to learn more, so…I might as well watch what they are saying on the tube’. Recession..doom and gloom. So, there it is. The public’s perception of recession becomes negative, and the reaction just makes the situation that much worse.

The Pullback

What indeed happens is the reduction in spending, entrenchment…we’ll hear words like cocooning (that was popular in the last recession), belt-tightening. With the consumer now picking up 70% of the GDP tab, this could really be troubling to growth. Not to mention the home ATM is probably completely out of cash in most cases…and you have a recipe for a lengthy recession. Or, do we? Again, the perception of bad times ahead is likely to hit not only the consumer but businesses alike. Corporations are not immune to the struggles in a recession and must make their own adjustments for survival. That could include reduced forecasts, cutbacks in spending and layoffs…just perpetuating a volatile situation. Housing, of course…has been in a recession for nearly a year and a half. That sector has subtracted large amounts from growth, yet the economy has still flourished (nearly 3.5% GDP in 2007).

Bottomline

Momentum is a double-edged sword. Great when it’s moving in your direction, landslide in the other. The swarm of recessionary news reports and doom/gloom forecasts permeate our brains day after day….what else are we supposed to think? It becomes a foregone conclusion, right? We hear it all the time, it must be happening, I’ll make adjustments, etc. With the Fed trying to create a softer landing (they are, aren’t they?), perhaps a recession will be shallow and slight before we resume a growth phase.

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